Judge Changes Dee Wyly Bankruptcy from Reorganization to Liquidation

© 2016 The Texas Lawbook.

By Mark Curriden

(Nov. 22) – U.S. Chief Bankruptcy Judge Barbara Houser has changed the case of 82-year-old Caroline “Dee” Wyly from a bankruptcy reorganization to a liquidation – a process that will allow a court-appointed trustee to physically take custody of all of Mrs. Wyly’s possessions and sell them off with the money going to the IRS.

A lawyer for Mrs. Wyly, who is the widow of Dallas entrepreneur Charles Wyly, came to tears during her plea Tuesday to Judge Houser that a neutral mediator be appointed to help them and their largest creditor, the IRS, reach a settlement agreement.

“I’m begging the court to send this to mediation,” Dallas lawyer Judith Ross, who represents Mrs. Wyly, told Judge Houser. “[Mrs. Wyly] wants a settlement. It is not the debtor’s fault that there’s not a settlement. The IRS has attempted to use Mrs. Wyly as leverage over the rest of the family.”

“If you had leverage, you would be using it, too,” Judge Houser responded.

“Not against an 82-year-old [innocent] woman, I would not,” Ross answered.

“I realize that this is not a good outcome for Mrs. Wyly,” Judge Houser said. “Mrs. Wyly could lose everything.”

The IRS is forcing Mrs. Wyly to sell all of her belongs as punishment because the government has been unable to convince Mrs. Wyly’s children to forfeit their rights to all the assets in the offshore trusts, according to court records and lawyers involved in the case.

Mrs. Wyly and her brother-in-law, businessman Sam Wyly, filed bankruptcy two years ago after a federal jury ruled that the Wyly brothers violated federal securities laws when they used a series of offshore trusts in the Isle of Man and the Cayman Islands to keep $1 billion in cash to themselves.

The IRS, as part of the Wylys’ bankruptcy, claimed that the brothers also violated federal tax laws by using the offshore trusts to hide from tax collectors. They demanded $2.2 billion in back taxes owed, penalties and interest.

The Wylys, who made billions of dollars growing and then selling Michaels Stores and Bonanza Steakhouses, said they created the offshore trusts in the early 1990s for the purpose of converting equity wealth the brothers earned from their various business interests into a fixed annual income stream. Charles Wyly died in a car crash in Colorado in 2011.

At a month-long trial in January, Sam Wyly testified that he believed the offshore trusts were legal because his lawyers and financial advisers told him and his deceased brother that they were proper.

Judge Houser, in a 459-page opinion issued in May, rejected the Wylys’ arguments and ruled that the brothers knew they were committing tax fraud. She cut the IRS’s demand in half, saying the Wylys owed $1.1 billion.

As part of her ruling, however, Judge Houser completely cleared Dee Wyly of any wrongdoing, saying that she was an “innocent spouse” who did not know what her husband and his brother were up to.

The Wylys agreed to pay the U.S. Securities and Exchange Commission $198 million last month to settle its case, but the IRS still wants its share and claims all property possessed by Mrs. Wyly, including her house, should be sold to pay off the tax bill.

The IRS claims in court documents that Mrs. Wyly “aims to cheat the United States out of collecting all of the funds available to pay at least a portion of Charles Wyly’s taxes.”

The IRS complains that they have received no assurances from the Wylys that the assets from the offshore trusts will be repatriated.

Lawyers for the Wylys said such issues are better resolved with the help of an independent mediator because they say the IRS has not negotiated with them in good faith.

“We haven’t had a meaningful opportunity to have global settlement discussions,” Stewart Thomas, who serves as general counsel for the Wyly family, told Judge Houser. “We cannot reach a deal for Dee without negatively impacting the rest of the family.”

The Wylys have appealed Judge Houser’s tax fraud ruling from May, but it may be months before the U.S. Court of Appeals in New Orleans hears arguments in the case.

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